Office of the Comptroller of the Currency Identifies Signs of Risk in Auto Lending Industry

 by Paige S. Fitzgerald and Alan Wingfield 

The Office of the Comptroller of the Currency (OCC) in its Spring 2014 Semiannual Risk Perspective report has stated that signs of risk in the auto lending industry are beginning to emerge, based on data that the OCC reviewed as of December 31, 2013.  The OCC’s Semiannual Risk Perspective is published by the OCC’s National Risk Committee, which monitors the condition of the federal banking system and emerging threats to the system’s safety and soundness.  The Committee includes senior agency officials who supervise banks of all sizes, as well as officials from the law, policy, accounting, and economics departments.

The Spring 2014 report explains that the OCC has observed risk-increasing trends in auto lending, including lengthening loan terms, increases in advance rates, and origination of loans to borrowers with lower credit scores.

The OCC notes that substantial deterioration in loan portfolios has not yet been seen, but several indicators of increasing risk are nevertheless evident.  Average loan-to-value (LTV) rates for both new and used vehicles are above 100%, due to higher vehicle prices and the inclusion of add-on products (such as service contracts, credit life insurance, and aftermarket accessories) as part of the amount financed.  Further, the average loss per vehicle has risen substantially in the last two years, and average charge-off amounts are higher for auto loans over the last year.  The OCC concludes that “these early signs of easing terms and increasing risk are noteworthy, and the OCC will continue to monitor product terms and risk layering practices to ensure that banks manage growth and exposure prudently.”

 Read more at Consumer Financial Services Law Monitor by Troutman Sanders LLP.

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